CHAPTER 7 Construction Contracts

1. e-Tag Co. enters into a construction contract with a customer. PFRS 15

requires e-Tag to do all of the following at contract inception, except
a. assess the customer's ability and intention to pay the contract
price on due date.
b. assess whether the promised goods and services in the contract
are individually distinct.
c. determine if the performance obligation(s) identified in the
contract is (are) satisfied over time or at a point in time.
d. estimate the total construction costs at completion.
2. Which of the following is incorrect regarding 'Step 2' of the revenue
recognition under PFRS 15?
a. An entity shall treat each promise in a contract to transfer a
distinct good or service as a separate performance obligation.
b. An entity shall treat a promise to transfer a distinct bundle of
goods or services as a separate performance obligation.
c. An entity shall treat a promise to transfer a series of distinct
goods or services that are substantially the same and have the
same pattern of transfer to the customer as a separate
performance obligation.
d. An entity shall treat all promises in a single contract as a single
performance obligation regardless of the nature of those
promises, if those promises are negotiated with the customer as
a single package.
3. Window Co. enters into a 5-year construction contract with a
customer. At contract inception, Window determines its performance
obligations in the contract and concludes that it has a single
performance obligation. Window also determines that its performance
in the contract creates an asset that the customer controls as the
asset is created. The asset created has no alternative use to Window
and Window has an enforceable right to payment for performance
completed to date. Window would most likely recognize revenue from
the contract
a. over the 5-year period by measuring its progress towards the
complete satisfaction of the performance obligation.
b. when the construction is completed and the promised goods and
services are transferred to the customer.
c. using the percentage of completion, because this is the method
required by PFRS 15 on all long-term construction contracts.
d. either a or b as a matter of accounting policy choice.
4. An entity uses an input method based on costs incurred to measure its
progress on a performance obligation that is satisfied over time.
Which of the following items would most likely affect the entity's
computation for the revenue to be recognized each year?

Revenue previously recognized Progress billings to date

a. Yes Yes
b. Yes No
c. No Yes
d. No No
5. An entity's performance obligation under a long-term construction
contract will be satisfied over time. Revenue is recognized when
recorded progress billings

are collected. exceed recorded costs.

a. Yes Yes
b. No Yes
c. No No
d. Yes No

(IACPA-Adapted)

6. Under the zero-profit method, contract revenue for the period is

a. equal to zero.
b. equal to the costs of construction recognized during the
period.
c. equal to the contract price divided by the estimated
construction period.
d. equal to the costs of construction recognized during the
period that are probable of recovery.
7. In the construction of complex structures wherein the costs incurred
and other efforts expended on the contract do not correlate to the
stage of completion of the project, the most appropriate method for
measuring progress on the contract is
a. input method based on costs. c. zero-profit method.
b. output method. d. complex method.
8. A long-term construction contract becomes onerous. What is. the
effect of the event on the entity's profit for the year under each of the
following scenarios?
The performance obligation in the contract is satisfied:

Over time and a Over time and no At a point in time

reasonable measure reasonable measure
of progress is of progress is
available available
a. decrease decrease decrease
b. decrease no effect decrease
c. decrease no effect no effect
d. decrease decrease no effect

9. An entity enters into a contract with a customer to build an asset for

P1M. In addition, the terms of the contract include a penalty of
P100,000 if the construction is not completed within three months of a
date specified in the contract. Which of the following statements is
correct?
a. The transaction price is a fixed amount of P900,000.
b. The transaction price includes a fixed amount of P1,000,000
and a variable amount of P100,000.
c. The transaction price includes a fixed amount of P900,000 and
a variable amount of P100,000.
d. The transaction price is a variable amount of P900,000.
10. Which of the following statements is incorrect regarding the
uncertainty in the collectability of the promised consideration in a
contract, according to PFRS 15?
a. If the uncertainty in collectability arises at contract inception,
the entity does not recognize any revenue and treats any
advanced collection as a liability.
b. If the uncertainty in collectability arises subsequent to contract
inception, the entity recognizes a loss.
c. If the uncertainty in collectability arises subsequent to contract
inception, the entity restates any revenue recognized in
previous periods.
d. The entity is required to assess the collectability of the
consideration at contract inception and continues to do so at
the end of each reporting period.
COMPUTATIONAL

1. George Co. enters into a contract to build an apartment for Jungle Co.
for a fixed fee of P20,000,000. At contract inception, George Co.
assesses its performance obligations in the contract and concludes
that it has a single performance obligation that is satisfied over time.
George Co. determines that the measure of progress that best depicts
its performance in the contract is input method based on costs
incurred. George estimates that the total contract costs would amount
to P16,000,000 over the construction period. George incurs contract
costs of P2,000,000 during the year. How much revenue is recognized
for the year?
a. 2,000,000 c. 4,000,000
b. 2,500,000 d. 0
2. On May 1, 20x1, Pressure Co. entered into a P3M fixed price contract to
construct a gym for a customer. Pressure Co. appropriately accounts
for this contract using the percentage of completion method based on
costs. Information on the contract is as follows:
20x1 20x2
Percentage of completion 20% 60%
Estimated total cost at completion 2,250,000 2,400,000
Profit recognized to date 150,000 360,000
How much are the revenue and cost of construction recognized in
20x2? Revenue Cost of construction
a. 1,200,000 990,000
b. 1,800,000 600,000
c. 1,800,000 1,200,000
d. 600,000 450,000
(AICPA - Adapted)

Use the following information for the next three questions:

In 20x1, Builder Co. entered into a contract with a customer for the
construction of a building. The contract price is a fixed fee of P9,000,000.
Information on the contract is shown below:
Dec. 31, Dec. 31,
20x1 20x2
Cumulative contract costs 3,900,000 6,300,000
incurred
Estimated total cost at 7,800,000 8,100,000
completion
3. At contract inception, Builder Co. assessed the contract in accordance
with the principles of PFRS 15 and concludes that it has a single
performance obligation that is satisfied over time. Builder Co.
determined that the appropriate measure of its progress on the
contract is input method based on costs incurred. How much are the
gross profit, revenue and cost of construction recognized in 20x2,
respectively?

Gross profit Revenue Cost of Gross profit

construction
a. 700,000 7,000,000 6,300,000
b. 250,000 4,500,000 4,250,000
c. 100,000 2,500,000 2,400,000
d. 80,000 2,500,000 2,420,000
4. The performance obligation is satisfied over time. However, Builder Co.
cannot reasonably measure the outcome of the performance obligation
but expects to recover all contract costs incurred. How much are the
gross profit, revenue and cost of construction recognized in 20x2,
respectively?

Gross profit Revenue Cost of Gross profit

construction
a. 0 0 0
b. 0 3,900,000 3,900,000
c. 0 2,400,000 2,400,000
d. (240,000) 0 0

5. At contract inception, Builder Co. assessed the contract in accordance

with the principles of PFRS 15 and concludes that it has a single
performance obligation that is satisfied at a point in time, which is
when the construction is completed and legal title over the constructed
building is transferred to the customer. How much are the gross profit,
revenue and cost of construction recognized in 20x2, respectively?

Gross profit Revenue Cost of Gross profit

construction
a. 0 0 0
b. 0 3,900,000 3,900,000
c. 0 2,400,000 2,400,000
d. (240,000) 0 0
6. Entity A, a construction firm, started work on a construction contract
with a fixed price of P18M in 20x1. At contract inception, Entity A
estimated total contract costs of P12M. The estimate remained
unchanged in 20x1 but a change in circumstance in 20x2 made Entity
A reassess the estimate. Entity A concluded on Dec. 31, 20x2 that
P12.3M is a more appropriate estimate of the total contract costs.
Construction work was finished in 20x3. The following were the actual
costs incurred:
20x1 20x2 20x3
Contract costs incurred per 3,000,0 5,364,0 3,916,0
year 00 00 00
Entity A's single performance obligation on the contract is satisfied
over time. Entity A uses the 'cost-to-cost' method in measuring its
progress on the contract. How much is the profit recognized in 20x3?

a. 1,386,000 c. 1,798,000
b. 1,597,000 d. 1,844,000
7. On Jan. 1, 20x1, Saturday Construction Co. enters into a contract to
construct a building for a customer. Saturday identifies its performance
obligation in the contract as satisfied over time. Saturday uses the
input method based on costs to measure its progress on the contract.
The contract price is P8M. Information on the construction is provided
below:
20x1 20x2 20x3
Contract costs incurred to 1,830,0 4,840,0 6,000,0
date 00 00 00
Billings per year 4,000,0 3,000,0 1,000,0
00 00 00
All Estimated costs to complete 4,270,0 1,210,0
00 00
billings in a year were collected also in that year. What amounts are
presented in Saturday's Dec. 31, 20x2 statement of financial position under
Gross amount due from (due to) cust. Contract asset
(liability).
a. 600,000 600,000
b. (600,000). (600,000)
c. (1,000,000) (1,000,000)
d. 600,000 (400,000)
traditional accounting and PFRS 15, respectively?
Use the following information for the next two questions:

In 20x1, Great Construction Co. started work on a P5M fixed price

contract. Information on the construction is shown below:
20x1 20x2 20x3
Costs incurred per year 1,425,0 2,615,0 1,040,0
00 00 00
Estimated costs to complete 3,325,0 1,010,0
00 00
Great uses the percentage of completion method (based on costs) in
recognizing revenue and profit from the contract.

8. How much is the loss provision recognized in 20x2?

a. 10,000 c. 25,000
b. 15,000 d. 115,000
9. How much is the profit (loss) recognized in 20x3?
a. (40,000) c. (30,000)
b. 40,000 d. 10,000

Use the following information for the next two questions:

On January 1, 20x1, Frowny Co. enters into a contract with a customer

for the construction of a building. Frowny's performance obligation on
the contract is satisfied over time. Frowny uses the 'cost-to-cost'
method in measuring its progress on the contract. Information on the
contract follows:

Transaction price 3,000,00

0
Estimated total costs of construction, Dec. 31, 2,250,00
20x1 0
Percentage of completion, Dec. 31, 20x1 40%
Contract costs incurred to date, Dec. 31, 20x2 1,800,00
0
Estimated costs to complete, Dec. 31, 20x2 600,000
10. How much is the estimated costs to complete as of Dec. 31,
20x1?
a. 860,000 c. 1,350,000
b. 970,000 d. 1,420,000
11. How much are the revenue and cost of construction recognized
Revenue Cost of construction in 20x2?
a. 1,050,000 900,000
b. 1,050,000 850,000
c. 1,000,000 850,000
d. 1,100,000 950,000

12. Entity X, a construction firm, enters into a contract to build a

water treatment facility for a customer. The contract price is total
construction costs plus 15% thereof. However, the variable fee
increases to 20% if the project is completed within three years. Entity X
incurs the following costs:
Year 1 Year 2 Year 3
Costs incurred each year 10,500,0 14,300,0 6,000,0
00 00 00
Estimated costs to complete 19,500,0 6,200,00
00 0

In Year 1, it is not highly probable that the additional fee will be

received. However, after a change in circumstances in Year 2, it is now
highly probable that the additional fee will be received. Entity X uses
the percentage of completion method based on costs. How much profit
is recognized in Year 3?

a. 835,000 c. 1,200,000
b. 986,000 d. 1,375,000

13. In 20x1, Dusk Co. started work on a construction contract with a

fixed price of P4,000,000. Dusk Co. uses the percentage completion
method and measures its progress based on assessment of the
physical completion of the project. The estimated total contract costs
were P3,000,000. Information on the project is as follows:
20x1 20x2
Costs incurred per year 1,425,000 1,125,000
Physical completion of project 35% 90%
How much are the revenue and cost of construction recognized in
20x2? Revenue Cost of construction
a. 2,280,000 1,730,000
b. 2,220,000 1,560,000
c. 2,200,000 1,650,000
d. 2,090,000 1,350,000

14. Dark Co. was contracted to build a house for a customer. The
contract price was P15,000,000, Dark Co. uses the percentage of
completion method, based on costs, in recognizing revenue from the
contract. The estimated total contract costs were P12,800,000. Dark
Co. incurred the following costs:
20x1 20x2
Costs incurred per year 1,536,0 9,992,0
00 00
In 20x2, the customer changed the design of the staircase and agreed
to a 5% increase in the original contract price. Dark Co. estimated that
additional P300,000 costs will be incurred. The performance obligation
in the contract remains a single performance obligation. How much are
the revenue and gross profit recognized in 20x2, respectively?

a. 12,060,000; 2,068,000 c. 12,680,000; 2,268,000

b. 12,268,000; 2,060,000 d. 12,860,000; 2,862,000

15. In 20x1, Hungry Co. started work on a long-term construction

contract. Hungry Co. accumulates costs and recognized profits using
the "Construction in progress" account. Information on the contract is
as follows:
20x1 20x2
Accounts receivable, ending balances. 100,000 300,000
Costs incurred each year 105,000 192,000
Construction in progress, ending 122,000 364,000
balances
Progress billings, cumulative balances 100,000 420,000
Hungry bills the customer based on the project's stage of completion,
which is computed using the costs incurred. How much are the profit,
revenue and total collections in 20x2, respectively?

a. 46,000; 224,000; 120,000 c. 50,000; 242,000;

120,000
b. 49,000; 240,000; 126,000 d. 50,000; 224,000;
112,000

STEPS IN THE REVENUE RECOGNITION UNDER PFRS 15

1. What is the correct sequence of the following steps in the revenue

recognition under PFRS 15?
I. Identify the performance obligations in the contract
II. Recognize revenue when (or as) a performance obligation is
satisfied
III. Identify the contract with the customer
IV. Determine the transaction price
V. Allocate the transaction price to the performance obligations
a. I, III, IV, II, and V c. II, I, IV, V, and III
b. III, I, IV, V, and II d. III, IV, I, V, and II

Step 1

2. Which of the following precludes an entity from applying PFRS 15?

a. The contract is a long-term construction contract with a customer.
b. The contract is a franchise contract with a customer.
c. The contract is an installment sale contract with a customer.
d. The contract is a sale contract with a non-customer, such as a
participant in the entity's activities who shares the related risks
and benefits rather than a mere recipient of the output of the
entity's ordinary activities.

Step 2

3. According to PFRS 15, each promise to deliver a distinct good or

service in a contract is treated as a separate performance obligation. A
promised good or service is distinct if
a. the customer can benefit from the good or service either on its
own or together with other resources that are readily available to
the customer.
b. the promise to transfer the good or service is separately
identifiable from other promises in the contract.
c. the good or service is an asset that the customer controls before
the transfer.
d. a and b
4. An entity, a contractor, enters into a contract to build a hospital for a
customer. The entity is responsible for the overall management of the
project and identifies various goods and services to be provided,
including engineering, site clearance, foundation, procurement,
construction of the structure, piping and wiring, installation of
equipment and finishing. Which of the following statements is most
likely to be correct?
a. The entity shall treat the promised goods and services as
separate performance obligations.
b. The entity shall treat the promised goods and services as a single
performance obligation because they are not separately
identifiable from each other.
c. The entity shall account for the contract using percentage of
completion because the contract is a long-term construction
contract.
d. The entity recognizes revenue as each promised good or service
is transferred to the customer.

Performance obligation satisfied over time or at a point in time

5. PFRS 15 requires an entity to determine whether the performance

obligations identified in a contract will be satisfied either over time or
at a point in time. A performance obligation is satisfied over time if
which of the following criteria is met?
a. The customer simultaneously receives and consumes the benefits
provided by the entity's performance as the entity performs.
b. The entity's performance creates an asset that the customer
controls as the asset is created.
c. The entity's performance does not create an asset with an
alternative use to the entity and the entity has an enforceable
right to payment for performance completed to date.
d. Any of these.
6. An entity enters into a contract with a customer, a government
agency, to build a specialized satellite. The entity builds satellites for
various customers, such as governments and commercial entities. The
design and construction of each satellite differ substantially, on the
basis of each customer's needs and the type of technology that is
incorporated into the satellite. The entity has an enforceable right to
payment for performance completed to date. Which of the following
statements is correct?
a. The performance obligation is satisfied at a point in time because
the satellite is specialized in nature.
b. The performance obligation is satisfied over time because the
entity's performance does not create an asset with an alternative
use to the entity and the entity has an enforceable right to
payment for performance completed to date.
c. The contract is outside the scope of PFRS 15.
d. The performance obligation is satisfied over time because it takes
a long period of time to build a satellite (about four to seven
years according to Google).
7. An entity enters into a contract with a customer to build an item of
equipment. The payment schedule in the contract specifies that the
customer must make an advance payment at contract inception of 10
per cent of the contract price, regular payments throughout the
construction period (amounting to 50 per cent of the contract price)
and a final payment of 40 per cent of the contract price after
construction is completed and the equipment has passed the
prescribed performance tests. The payments are nonrefundable unless
the entity fails to perform as promised. If the customer terminates the
contract, the entity is entitled only to retain any progress payments
received from the customer. The entity has no further rights to
compensation from the customer. Which of the following statements is
incorrect?
a. The entity's performance obligation is not satisfied over time
because the entity does not have a right to payment for
performance completed to date.
b. The entity's performance obligation is satisfied at a point in time.
c. The entity has a right to payment for performance completed to
date because the payments are non-refundable.
d. The entity does not need to assess whether the equipment would
have an alternative use to the entity.
Step 3

8. Entity X, a contractor, enters into a contract to construct a building for

a customer. The contract states a consideration equal to construction
costs incurred plus 15% thereof. Entity X estimates total construction
costs of P10M. How much is Entity X's initial estimate of the
transaction price?

a. 10M c. 11.5M
b. 15% d. not determinable

Step 4

9. Entity Y, a contractor, enters into a contract to construct a new

building and to renovate an existing building for a customer. The
contract states a single price. However, Entity Y determines that the
promised services are individually distinct, and thus forming two
separate performance obligations. How should Entity Y allocate the
transaction price to the performance obligations?
a. based on the relative stand-alone prices of the services
b. based on the man hours expended on each service
c. based on the expected costs of the services
d. transaction price divided by two

Step 5

10. Revenue from a performance obligation that is satisfied over

time is recognized
a. at the point in time when the performance obligation is fully
satisfied.
b. over time as the entity progresses towards the complete
satisfaction of the obligation.
c. using the straight-line basis, in all cases.
d. Any of these as a matter of accounting policy choice.